The Tokyo government gave a bleak assessment of Japanese company profits on Monday after the Federal Reserve Chairman Ben Bernanke said the chief threat to U.S. recovery from recession was a lack of political will.
Despite the grim news from Japan, global share markets were boosted by Citigroup, Bank of America and JPMorgan Chase saying they returned to black early this year and assuring they should ride out the recession without more taxpayer help.
"It seems as if overall worry about the U.S. financial sector is fading," said Noritsugu Hirakawa, a strategist at Okasan Securities in Japan.
In export-driven Japan, firms such as Toyota Motor Corp and Sony Corp have been rapidly scaling back output and cutting jobs to cope with plummeting sales, as the economy heads for its longest recession since World War Two.
"The economy is worsening rapidly while in a severe situation," the government said in its monthly report, reiterating its weakest diagnosis since 2002, when the economy suffered from the collapse of the dot.com bubble.
"We have no positive proof as to when the U.S. economy will recover as it depends on when financial markets will stabilise," said Tomoko Hayashi, director for overseas economies at the Cabinet Office.
Bernanke said at the weekend the U.S. economy should start recovering from recession next year if there is the political will to complete the costly rescue of the banking system.
Revelations that the American International Group agreed to hefty employee bonuses and paid billions of dollars to European banks and Wall Street investment firms, were set to test the will of Americans to bankroll the financial rescue.
President Barack Obama's senior advisers and Democratic and Republican congressional leaders voiced outrage that AIG, recipient of a $173 billion taxpayer bailout, is paying $165 million in employee bonuses.
WALL STREET-MAIN STREET
Bernanke said the rescue was vital to protect U.S. jobs. "I care about Wall Street for one reason and one reason only, because what happens on Wall Street matters to Main Street."
In a rare interview, Bernanke said his greatest worry is that politicians and the public will withdraw support for efforts aimed at stabilising the shattered banking system. "The biggest risk is that, you know, we don't have the political will."
There was a muted market reaction to a weekend pledge from Group of 20 nations to concentrate their fiscal and monetary firepower on fighting the economic crisis. The group also focused on money for the IMF and regulating hedge funds.
"At least risk aversion is decreasing and there was no disappointment on the back of the G20," said Patrick Jacq, interest rate strategist at BNP Paribas in Paris.
Meeting after the G20 meeting, British Prime Minister Gordon Brown and European Commission President Jose Manuel Barroso both said on Monday the key to world global economic recovery was for nations to work together to avoid protectionism.
"It is a huge effort, but probably we still need to do more but let's not forget what we have been doing already and let's now work with other partners to get out of this crisis as soon as possible," Barosso told reporters after the London talks.
"In 2009 we must tackle protectionism head on and make sure that we do not risk a spiral of trade collapse," said Brown, who also noted China and the European Union were in close contact about how "to help each other through these difficult times".
Shares in British bank Barclays jumped 14.6 percent after it confirmed talks over the possible sale of its iShares unit, which could help it to avoid entering the government's asset protection scheme.
London's FTSE index was up 1.5 percent, led by financial stocks as investor sentiment improved after the assurances from the U.S. banking sector.
The dollar fell, while the rally in financial shares pulled European stock markets higher for a fifth straight session. Indexes pointed to a higher opening on Wall Street on Monday.
Oil fell $2 to $44 a barrel after OPEC resisted calls for further output cuts and kept its targets unchanged on Sunday, out of concern about the health of the world economy.
